NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
October
29, 2016 and October 31, 2015
Note 1. Nature of Operations
Trans World Entertainment Corporation and subsidiaries (“the
Company”) is a specialty retailer of entertainment products, including video, trend, music, electronics and related products
in the United States. The Company operates a chain of retail entertainment stores, primarily under the names f.y.e. for your entertainment
and Suncoast Motion Pictures, and e-commerce sites, www.fye.com, and www.secondspin.com in a single industry segment. As of October
29, 2016, the Company operated 294 stores totaling approximately 1.7 million square feet in the United States, the District of
Columbia and the Commonwealth of Puerto Rico.
On October 17, 2016, the
Company acquired all of the issued and outstanding capital stock of etailz, Inc. (“etailz”), an innovative and leading
digital marketplace retail expert. See Note 6 to the Condensed Consolidated Financial Statements for additional information.
Liquidity and Cash Flows:
The Company’s primary sources of working capital are cash
and cash equivalents on hand, cash provided by operations and borrowing capacity under its revolving credit facility (See Note
9 for further details). The Company’s cash flows fluctuate from quarter to quarter due to various items, including seasonality
of sales and earnings, merchandise inventory purchases and returns and the related terms on the purchases and capital expenditures.
Management believes it will have adequate resources to fund its cash needs for the next twelve months and beyond, including its
capital spending, seasonal increase in merchandise inventory and other operating cash requirements and commitments.
Management anticipates that any future cash requirements due
to a shortfall in cash from operations would be funded by the Company’s cash and cash equivalents on hand and its revolving
credit facility.
Seasonality:
The Company’s business is seasonal, with the fourth fiscal
quarter constituting the Company’s peak selling period. In fiscal 2015, the fourth quarter accounted for approximately 35%
of annual net sales and all of net income. In anticipation of increased sales activity in the fourth quarter, the Company purchases
additional inventory and hires seasonal associates to supplement its core store sales and distribution center staffs. If, for any
reason, the Company’s sales were below seasonal norms during the fourth quarter, the Company’s operating results could
be adversely affected. Quarterly sales can also be affected by the timing of new product releases, new store openings, store closings
and the performance of existing stores.
Note 2: Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements consist of Trans World Entertainment Corporation, its wholly-owned subsidiary, Record Town, Inc. (“Record Town”),
Record Town’s subsidiaries and etailz, Inc., all of which are wholly-owned. All significant intercompany accounts and transactions
have been eliminated.
The interim condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these
unaudited condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management,
are necessary for the fair presentation of such financial statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain information and footnote disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules
and regulations applicable to interim financial statements.
During the thirty-nine weeks ended October 29, 2016, the Company
recorded an immaterial adjustment between Other Revenue and Selling, General and Administrative expenses in its prior year condensed
consolidated financial statements for miscellaneous income, primarily related to commissions earned from third parties. The immaterial
adjustment did not impact prior year loss from operations, net loss, and basic and diluted loss per share. With the adjustment,
the prior year presentation is consistent with the current year presentation.
The information presented in the accompanying
unaudited condensed consolidated balance sheet as of January 30, 2016 has been derived from the Company’s January 30, 2016
audited consolidated financial statements. All other information has been derived from the Company’s unaudited condensed
consolidated financial statements as of and for the thirty-nine weeks ended October 29, 2016 and October 31, 2015. These unaudited
condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016.
The Company’s significant accounting
policies are the same as those described in Note 1 to the Company’s Consolidated Financial Statements on Form 10-K for the
fiscal year ended January 30, 2016. Except as described herein, there has been no material change to the accounting policies applied
to our consolidated results and footnote disclosures. In accordance with the accounting guidance for business combinations, we
use the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed
based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values
of the assets acquired and liabilities assumed are recognized as goodwill. The valuations of acquired assets and liabilities will
impact the determination of future operating results. In addition to using management estimates and negotiated amounts, we use
a variety of information sources to determine the estimated fair values of the assets and liabilities, including third-party appraisals
for the estimated value and lives of identifiable intangible assets and property and equipment. The business and technical judgment
of management is used in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance
for goodwill and intangible assets.
Note 3. Recently Issued Accounting Pronouncements
In 2014, the FASB issued Accounting Standard Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects
to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company’s fiscal year beginning January
28, 2018. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition
method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial
reporting.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the
Measurement of Inventory. The amendments, which apply to inventory that is measured using any method other than the last-in, first-out
(LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied
on a prospective basis. We are currently assessing the potential impact of adopting this ASU, but do not, at this time, anticipate
a material impact to our consolidated results of operations, financial positions or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases,
which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of the ASU is that an entity
should recognize the rights and obligations resulting from leases as assets and liabilities. The new standard requires
qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that
users can understand more about the nature of an entity’s leasing activities, including significant judgments and
changes in judgments. The new standard will be effective for the Company’s fiscal year beginning February 3, 2019, and
requires the modified retrospective method of adoption. Early adoption is permitted. The Company is in the process of
determining the method and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated financial
statements.
In November 2016, the FASB issued ASU 2016-18, Statement of
Cash Flows, which require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard as part of its quarterly
report for the period ended October 29, 2016.
Note 4. Stock Based Compensation
As of October 29, 2016, there was approximately $0.9 million
of unrecognized compensation cost related to stock awards that is expected to be recognized as expense over a weighted average
period of 2.8 years.
As of October 29, 2016, stock awards authorized
for issuance under the Company’s current long term equity incentive plans totaled 8.0 million. There are certain authorized
stock plans for which the Company no longer grants awards. Of these awards authorized for issuance, 2.6 million were granted and
are outstanding, 1.3 million of which were vested and exercisable. Awards available for future grants at October 29, 2016 were
1.2 million.
The table below outlines the assumptions that the Company used
to estimate the fair value of stock options granted during the thirty-nine weeks ended October 29, 2016:
Dividend yield
|
|
|
0%
|
Expected stock price volatility
|
|
|
38.0%-47.5%
|
Risk-free interest rate
|
|
|
1.06%-1.56%
|
Expected award life (in years)
|
|
|
4.92-6.98
|
Weighted average fair value per share of options granted during the period
|
|
|
$1.19
|
The following table summarizes stock award activity during the
thirty-nine weeks ended October 29, 2016:
|
|
Employee and Director Stock Award Plans
|
|
|
|
Number of
Shares
Subject To
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
|
Other
Share
Awards (1)
|
|
|
Weighted
Average
Grant Fair
Value
|
|
Balance January 30, 2016
|
|
|
2,111,825
|
|
|
$
|
4.04
|
|
|
|
5.00
|
|
|
|
211,174
|
|
|
$
|
3.79
|
|
Granted
|
|
|
909,664
|
|
|
|
3.74
|
|
|
|
9.80
|
|
|
|
68,097
|
|
|
|
3.84
|
|
Canceled
|
|
|
(636,425
|
)
|
|
|
5.25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(18,000
|
)
|
|
|
2.09
|
|
|
|
—
|
|
|
|
(108,344
|
)
|
|
|
3.68
|
|
Balance October 29, 2016
|
|
|
2,367,064
|
|
|
$
|
3.61
|
|
|
|
7.44
|
|
|
|
170,927
|
|
|
$
|
3.87
|
|
Exercisable October 29, 2016
|
|
|
1,154,189
|
|
|
$
|
3.51
|
|
|
|
5.88
|
|
|
|
63,427
|
|
|
$
|
4.50
|
|
|
(1)
|
Other Share Awards include deferred shares granted to Directors and restricted share units granted
to executive officers.
|
As of October 29, 2016, the intrinsic value
of stock awards outstanding was approximately $958,000 and exercisable was $736,000.
In connection with the acquisition of etailz, the Company issued
1,572,552 restricted shares of Company stock to a key etailz employee, with a grant date fair value of $3.56 per share. These shares
vest ratably through January 2019. As of October 29, 2016, the Company recognized $207,000 of compensation cost related to these
shares. As of October 29, 2016, there was approximately $5.4 million of unrecognized compensation cost related to these restricted
shares that is expected to be recognized as expense over a weighted average period of 2.3 years.
Note 5. Defined Benefit Plans
The Company maintains a non-qualified Supplemental Executive
Retirement Plan (“SERP”) for certain executive officers of the Company. The SERP provides eligible executives defined
pension benefits that supplement benefits under other retirement arrangements. During the thirty-nine weeks ended October 29, 2016,
the Company did not make any cash contributions to the SERP and presently expects to pay approximately $1.1 million in benefits
relating to the SERP during fiscal 2016.
The measurement date
for the SERP is the fiscal year end, using actuarial techniques which reflect estimates for mortality,
turnover and expected retirement. In addition, management makes assumptions concerning future salary increases. Discount rates
are generally established as of the measurement date using theoretical bond models that select high-grade corporate bonds with
maturities or coupons that correlate to the expected payouts of the applicable liabilities.
The following represents the components
of the net periodic pension cost related to the Company’s SERP for the respective periods:
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 31,
|
|
|
October 29,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
15
|
|
|
$
|
17
|
|
|
$
|
45
|
|
|
$
|
51
|
|
Interest cost
|
|
|
137
|
|
|
|
145
|
|
|
|
411
|
|
|
|
435
|
|
Amortization of pension costs
|
|
|
55
|
|
|
|
86
|
|
|
|
166
|
|
|
|
258
|
|
Amortization of net gain
(1)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
(27
|
)
|
Net periodic pension cost
|
|
$
|
203
|
|
|
$
|
239
|
|
|
$
|
610
|
|
|
$
|
717
|
|
|
(1)
|
The amortization of net gain is related to a director retirement plan previously provided by the
Company.
|
Note 6. Business Combinations
On October 17, 2016, the Company
completed the purchase of all of the issued and outstanding shares of etailz, Inc. (“etailz”), an innovative and
leading digital marketplace retail expert. The Company paid $38.1 million in cash and issued 5.7 million shares of TWMC stock
at closing to the shareholders of etailz as consideration for their shares. Based on the fair value of $3.56 per share on the
acquisition date, the shares had a value of $20.4 million. An
earn-out of up to a maximum of $14.6 million will be payable in fiscal 2018 and fiscal 2019 subject to the achievement by
etailz of $6 million in operating income in fiscal 2017 and $7.5 million in fiscal 2018. In connection with the acquisition,
The Company assumed the liability for etailz’s employee retention bonus plan, of which $1.9 million was due and payable
at closing and the remaining $2.3 million will be earned over a two year service period. The acquisition and related costs
were funded primarily from the Company’s cash on hand and short term borrowings under its revolving credit facility.
The acquisition was accounted for using the purchase method of accounting. As of the date of filing this quarterly report on
Form 10-Q, the preliminary purchase accounting has not yet been finalized due primarily to the proximity of the closing date
of the transaction to the filing date of this quarterly report and the pending receipt of the final valuation for certain
assets, including identifiable intangible assets.
The acquisition date fair value of the consideration for the
above transaction consisted of the following as of October 17, 2016 (in thousands):
Cash consideration
|
|
$
|
38,100
|
|
Fair value of stock consideration
|
|
|
20,415
|
|
Fair value of contingent consideration
|
|
|
10,381
|
|
Fair value of purchase consideration
|
|
$
|
68,896
|
|
The excess of purchase consideration paid over the fair value
of identifiable intangible assets acquired was recorded as goodwill. The goodwill recognized is not deductible for income tax purposes.
The
following table summarizes the preliminary allocation of the aggregate purchase price to the estimated fair value of the net assets
acquired:
|
|
($ in thousands)
|
|
|
|
October 17, 2016
|
|
Assets Acquired
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,800
|
|
Accounts receivable
|
|
|
1,533
|
|
Prepaid expenses and other current assets
|
|
|
6,603
|
|
Inventory
|
|
|
14,669
|
|
Property and equipment, net
|
|
|
649
|
|
Other long term-assets
|
|
|
12
|
|
Acquired intangible assets:
|
|
|
|
|
Trade names
|
|
|
3,200
|
|
Technology
|
|
|
6,700
|
|
Vendor relationships
|
|
|
19,000
|
|
Unfavorable lease valuation
|
|
|
(125
|
)
|
Goodwill
|
|
|
39,800
|
|
Total assets acquired
|
|
$
|
93,841
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable
|
|
$
|
4,227
|
|
Debt
|
|
|
5,289
|
|
Other current liabilities
|
|
|
7,927
|
|
Deferred taxes
|
|
|
7,502
|
|
Total liabilities assumed
|
|
$
|
24,945
|
|
Net assets acquired
|
|
$
|
68,896
|
|
The Company recognized total acquisition related costs of $2.2
million for the thirteen and thirty-nine weeks ended October 29, 2016. These costs are included in selling, general and administrative
expenses in the Company’s condensed consolidated statements of operations.
The results of operations of etailz will be reported
in the Company’s etailz segment and has been included in the consolidated results of operations of the Company from
the date of acquisition. The following unaudited pro forma financial information for the thirteen weeks and thirty-nine weeks
ended October 29, 2016, and October 31, 2015, presents consolidated information as if the etailz acquisition had occurred on
February 1, 2015. Because of different fiscal period ends, and in order to present results for comparable periods, the
unaudited pro forma financial information for the thirty-nine weeks ended October 29, 2016, combines (i) the Company’s
historical statement of operations for the thirty-nine weeks ended October 29, 2016, and (ii) etailz historical statement of
income for the period from January 1, 2016 through August 31, 2016 and October 1, 2016 through October 16, 2016. The
unaudited pro forma financial information for the thirteen weeks ended October 29, 2016, combines (i) the Company’s
historical statement of operations for the thirteen weeks ended October 29, 2016; and (ii) etailz historical statement of
income for the period from July 1, 2016 through August 31, 2016 and October 1, 2016 through October 16, 2016. The unaudited pro
forma financial information for the thirty-nine weeks and thirteen weeks ended October 31, 2015, combines (i) the
Company’s historical statement of operations for the thirty-nine weeks and thirteen weeks ended October 31, 2015, and
(ii) etailz historical statement of income for the nine months and three months ended October 31, 2015. The unaudited pro
forma financial information is presented after giving effect to certain adjustments for acquisition-related costs,
depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, and related income
tax effects. The unaudited pro forma financial information is based upon currently available information and upon certain
assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information
does not purport to present what the Company’s results of operations would actually have been if the aforementioned
transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project the
Company’s financial position or results of operations at any future date or for any future period.
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 31,
|
|
|
October 29,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma total revenue
|
|
$
|
90,655
|
|
|
$
|
90,942
|
|
|
$
|
287,060
|
|
|
$
|
278,862
|
|
Pro forma net loss
|
|
|
(6,945
|
)
|
|
|
(5,441
|
)
|
|
|
(13,513
|
)
|
|
|
(10,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per share
|
|
$
|
(0.19
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average number of common shares outstanding – basic and diluted
|
|
|
36,157
|
|
|
|
36,838
|
|
|
|
36,257
|
|
|
|
36,871
|
|
Note 7. Identifiable Intangible Assets
Identifiable intangible assets as of October 29, 2016 consisted
of the following (in thousands, except weighted-average amortization period):
|
|
October 29, 2016
|
|
|
|
Weighted Average
Amortization
Period
(in months)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor Relationships
|
|
|
120
|
|
|
$
|
19,000
|
|
|
$
|
61
|
|
|
$
|
18,939
|
|
Technology
|
|
|
60
|
|
|
|
6,711
|
|
|
|
87
|
|
|
|
6,624
|
|
Trade names and trademarks
|
|
|
60
|
|
|
|
3,200
|
|
|
|
26
|
|
|
|
3,174
|
|
|
|
|
|
|
|
$
|
28,911
|
|
|
$
|
174
|
|
|
$
|
28,737
|
|
Estimated amortization expense for the remaining three months
of fiscal 2016 and each of the five succeeding fiscal years and thereafter is as follows:
Year
|
|
Amortization
|
|
($ in thousands)
|
|
|
|
2016
|
|
$
|
1,094
|
|
2017
|
|
|
3,880
|
|
2018
|
|
|
3,880
|
|
2019
|
|
|
3,880
|
|
2020
|
|
|
3,880
|
|
2021
|
|
|
3,220
|
|
Thereafter
|
|
$
|
8,903
|
|
Note 8. Restricted Cash
In connection with the acquisition of etailz, Inc. and under
the terms of the share purchase agreement, the Company was required to hold certain cash in escrow. At October 29, 2016, the Company
had restricted cash of $16.1 million reported in long-term assets on the consolidated balance sheet. The Company designated $1.5
million of the restricted cash to be made available to satisfy any indemnification claims and $14.6 million of the restricted cash
to equal the maximum earn-out amount that could be paid to the selling shareholders of etailz, Inc. in accordance with the share
purchase agreement.
A summary of cash, cash equivalents and restricted cash is as
follows ($ in thousands):
|
|
October 29,
|
|
|
January 30,
|
|
|
|
2016
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
4,708
|
|
|
$
|
104,311
|
|
Restricted cash
|
|
|
16,100
|
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
20,808
|
|
|
$
|
104,311
|
|
Note 9. Line of Credit
In May 2012, the Company entered into a $75 million credit
facility (“Credit Facility”) which amended the previous credit facility. The principal amount of all outstanding
loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in May 2017, unless
otherwise paid earlier pursuant to the terms of the Credit Facility. The Company currently expects to review its Credit
Facility prior to the expiration date. Payments of amounts due under the Credit Facility are secured by the assets of the
Company.
The Credit Facility includes customary provisions, including
affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions.
The Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy,
and certain changes of control. The Credit Facility also contains other terms and conditions, including limitations on the payment
of dividends and covenants around the net number of store closings. The Company is compliant with all covenants.
Interest under the Credit Facility will accrue, at the election
of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the
level of availability, with the Applicable Margin for LIBO Rate loans ranging from 2.25% to 2.75% and the Applicable Margin for
Prime Rate loans ranging from 0.75% to 1.25%. In addition, a commitment fee ranging from 0.375% to 0.50% is also payable on unused
commitments. The availability under the Credit Facility is subject to limitations based on inventory levels.
As of October 29, 2016, the Company had
$5.9 million in outstanding borrowings under the revolving credit facility and $53.7 million was available for borrowing. The weighted
average interest rate on outstanding borrowings for the thirteen week period ended October 29, 2016 was 3.73%. As of October 31,
2015, there were no borrowings outstanding under lines of credit and $65.0 million was available for borrowings.
During the thirteen weeks ended October 29, 2016 , in connection
with the acquisition of etailz, the Company paid off etailz’s outstanding letter of credit in the amount of $4.7 million,
as the Company assumed this liability and paid off immediately following the acquisition.
Note 10. Accumulated Other Comprehensive
Loss
Accumulated other comprehensive loss that the Company reports
in the condensed consolidated balance sheets represents net loss, adjusted for the difference between the accrued pension liability
and accrued benefit cost, net of taxes, associated with the Company’s defined benefit plans. Comprehensive loss consists
of net loss and the reclassification of pension costs previously reported in comprehensive loss for the thirteen and thirty-nine
weeks ended October 29, 2016 and October 31, 2015.
Note 11. Depreciation and Amortization
of Fixed Assets and Intangible Assets
Depreciation and amortization of fixed
assets included in the condensed consolidated statements of operations is as follows:
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 29,
|
|
|
October 31,
|
|
|
October 29,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Cost of sales
|
|
$
|
104
|
|
|
$
|
124
|
|
|
$
|
301
|
|
|
$
|
370
|
|
Selling, general and administrative expenses
|
|
|
2,222
|
|
|
|
1,227
|
|
|
|
5,309
|
|
|
|
3,238
|
|
Total
|
|
$
|
2,326
|
|
|
$
|
1,351
|
|
|
$
|
5,610
|
|
|
$
|
3,608
|
|
Note 12. Basic and Diluted Loss Per
Share
Basic loss per share is calculated by dividing
net loss by the weighted average common shares outstanding for the period. Diluted Loss per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock (net of any assumed repurchases) that then shared in the earnings of the Company, if any. It is
computed by dividing net loss by the sum of the weighted average shares outstanding and additional common shares that would have
been outstanding if the dilutive potential common shares had been issued for the Company’s common stock awards from the Company’s
Stock Award Plans.
For the thirteen and thirty-nine week periods ended October
29, 2016 and October 31, 2015, the impact of all outstanding stock awards was not considered because the Company reported a net
loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share is the same.
Total anti-dilutive stock awards for the
thirteen and thirty-nine week periods ended October 29, 2016 were approximately 1.9 million shares and 1.8 million shares, respectively,
as compared to 1.8 million shares and 1.7 million shares, respectively, for the thirteen and thirty-nine weeks ended October 31,
2015.
Note 13. Shareholders’ Equity
In connection with the acquisition of etailz, in October 2016,
the Company issued 5.7 million shares of Company common stock to the selling shareholders of etailz at fair value of $3.56 per
share.
During the thirty-nine week period ended October 29, 2016, the
Company repurchased 686,137 shares of common stock at an average price of $3.87 per share. Since the inception of the program,
the Company has repurchased 2,558,180 shares of common stock at an average price of $3.83 per share. The Company has approximately
$12.2 million available for future purchases under its repurchase program.
The Company classifies the repurchased shares as treasury stock
on the Company’s condensed consolidated balance sheet.
Note 14. Income Taxes
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers the
scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this
assessment. Based on available objective evidence, management concluded that a full valuation allowance should continue to be recorded
against the Company's deferred tax assets. Management will continue to assess the need for and amount of the valuation allowance
against the deferred tax assets by giving consideration to all available evidence to the Company’s ability to generate future
taxable income in its conclusion of the need for a full valuation allowance. Any reversal of the Company’s valuation allowance
will favorably impact its results of operations in the period of reversal. The Company is currently unable to determine whether
or when that reversal might occur, but it will continue to assess the realizability of its deferred tax assets and will adjust
the valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will become realizable in
the future. The Company has significant net operating loss carry forwards and other tax attributes that are available to offset
projected taxable income and current taxes payable, if any, for the year ending January 28, 2017. The deferred tax impact
resulting from the utilization of the net operating loss carry forwards and other tax attributes will be offset by a reduction
in the valuation allowance. As of January 30, 2016, the Company had a net operating loss carry forward of $158.8 million for federal
income tax purposes and approximately $247 million for state income tax purposes that expire at various times through 2035 and
are subject to certain limitations and statutory expiration periods.
During the third quarter of fiscal 2016, in connection with
the acquisition of etailz, the Company recognized a tax benefit of $7.5 million related to the reduction of its valuation allowance
equivalent to the net deferred tax liabilities recorded on the etailz opening balance sheet. In assessing the realizability of
the net deferred tax assets at the time of the acquisition of etailz, management considered whether it is more likely than not
that some portion or all of the remaining deferred tax assets will not be realizable. Management considered the scheduled reversal
of taxable temporary differences, projected future taxable income when combining Trans World Entertainment projected income or
loss with etailz projected income or loss, and tax planning strategies when making this assessment. Based on the available objective
evidence, management concluded that a full valuation allowance should be recorded against its deferred tax assets net of the deferred
tax liabilities recorded in connection with the etailz acquisition.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION